Post-Partisanship Has Brought Recessions, Partisanship Booms

As George H.W. Bush turns 88 years of age, there has come a strange bout of nostalgia for days when Congress and the President worked together amicably. The notable example of the H.W. years was the atrocious “budget deal” of 1990 which made Bush break his campaign pledge of “no new taxes.”

It’s probably hard for us to fathom, given the heights of today’s deficit numbers, but were there ever hysterics over the “Reagan deficits” of the 1980s. The thing is, after 1986, the Reagan deficits were parked at the same number, $150 billion a year, while nice GDP growth of 3.5% was rendering them ever smaller as a share of the economy. Suddenly in 1990 the deficit was primed to jump over $200 billion, and in his second year in office, Bush buckled to pressure for “revenue increases” six weeks before the first Gulf war.

Bam—the economy went straight into recession. After the details of the deal were worked out, and as that recession persisted, the income tax was raised by three points, there was a new luxury tax, and the gas tax went up. Macroeconomic results? GDP growth was all of 1.9% per year (our own sad number today) for four straight years, through 1993 and Bill Clinton’s tax increase at the hands of a similarly cooperative Congress. The deficit? It blew way past the 1990 peak, and was over $200 billion for the full first half of the decade.

But then a funny thing happened. In 1994, the Republicans made clear that they were gunning to take Congress, and that they were going to do things differently. The only thing they would prove “cooperative” about with respect to the executive would be cuts to both taxes and spending.

Here’s the most important fact of the 1990s: the secular floor of the stock and bond markets was election week, November 1994. Remember the epic 1990s bull market? It started on a dime the day the Republicans took Congress.

In the several years after 1994, with Newt Gingrich’s Congress calling the shots and the Clinton presidency not so much cooperating as getting out of the way and taking orders, federal outlays crashed down four full percentage points of GDP, down from the Bush-era peak of over 22 percent to just over 18 percent. In the face of the spending decline, and a tax cut signed into law by Clinton in 1997, GDP exploded as much as it ever had in the storied runs of modern American economic history, be it the Roaring 1920s or John F. Kennedy’s go-go 1960s. 4.5% growth carried the economy into the new millennium.

Now, it remains a Beltway cliché that the reason we got budget surpluses in the late 1990s was the “preparatory work” done by the 1990 and 1993 budget deals, stuffed as they were with tax increases. The problematic fact for this argument is that early November 1994 floor for the financial markets. Did the agents in the economy really think all those taxes were going to set things right from 1990 to 1993? If they had, one imagines the bull market, not to mention the plump GDP growth, would have materialized then.

But that’s not what happened. It was only when the Republican takeover of 1994 was a fait accompli that it became clear that the only option for both taxation and spending was to go down. The markets and the economy responded with one of their greatest swells of modern times, and the budget had no hope but to swing into surplus.

Today, Norman Ornstein and others are busy telling us that we suffer from a plague of partisanship unseen in history. If so, one might ask, why are federal outlays way past the early 1990s peak, indeed the post-World War II peak, at 24 percent of overall output? Sounds like there’s been some pretty odious cooperation between both branches of government—in the direction of pork.

If this nation wants to recapture some of the great 1990s lightning, the example to follow is not the Bush or early Clinton years. The thing to do is mimic what ensued after election week 1994, and make it clear to the economy that the government is bent on receding.

Books on the topic discussed in this essay may be found in The Imaginative Conservative Bookstore. Originally published at Forbes.com the essay is reprinted here with gracious permission of Brian Domitrovic.

The Imaginative Conservative applies the principle of appreciation to the discussion of culture and politics—we approach dialogue with magnanimity rather than with mere civility.

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